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Summary

  • The recent sell-off in the stock has improved the valuation for AMAG Pharmaceuticals.
  • The company stands to benefit as it plans to increase market share for its commercial drugs.
  • AMAG is expected to turn a profit this year, which should drive the stock higher.
  • However, investors will have to assess their risk tolerance as threats to the share price remain on the table.

AMAG Pharmaceuticals (NASDAQ:AMAG) has plans to increase sales for its two FDA approved drugs: Feraheme and MuGard. Feraheme is marketed in the United States and Canada. The drug is an intravenous iron for the treatment of iron deficiency anemia in adult patients with chronic kidney disease (CKD) in the U.S. The same drug is marketed as Rienso in the European Union. MuGard is an oral rinse for the treatment of oral mucositis and various types of oral wounds. AMAG currently has a 15.5% market share of the non-dialysis market with Faraheme. The company has plans to increase the market share for Feraheme and MuGard to significantly impact AMAG's revenue growth.

The need for an intravenous form of iron is the result of many patients' inability to tolerate oral iron. Oral iron can be difficult for the gastrointestinal tract to absorb, causing diarrhea, constipation, and cramping. As a result, some patients stop taking their oral iron supplements. Feraheme solves this problem with an I.V. iron treatment.

Mucositis is one of the most common and serious side effects of chemotherapy. MuGard treats the mouth sores that are caused by chemotherapy. AMAG estimates that the market opportunity for treating mucositis is over $500 million. The company has plans to increase revenues of MuGard to capitalize on this opportunity. I think that AMAG's strategy to increase the market share of Feraheme and MuGard should lead to improved fundamentals for the company. The company should turn profitable in the second half of 2014 and build on this profitability in 2015.

Improved Valuation

AMAG's stock began falling before the biotech industry sell-off in 2014. The stock began falling at the end of October 2013. One event that triggered the sell-off was the company's announcement that it filed an SEC S-3 form. This form is typically filed before a company implements a new share offering. Therefore, investors sold the stock on concerns of future share dilution on fears of a possible large new share offering.

Another negative catalyst for the stock came in January 2014, when the FDA issued a CRL, denying AMAG's supplemental new drug application for Feraheme to be used beyond chronic kidney disease to include all adult patients with iron deficiency anemia that cannot tolerate oral iron. The FDA stated that AMAG did not provide sufficient information to permit labeling of Feraheme for safe and effective use for the new indication. This can be fixed by producing additional clinical trial data in the broad iron deficiency anemia population with safety information regarding serious hypersensitivity/anaphylaxis, cardiovascular events, and death. The FDA suggested that AMAG should also evaluate alternative dosing and administration of Feraheme. AMAG should be able to follow through on the FDA recommendations and obtain approval for the broader use of Feraheme.

The selling in the stock accelerated during the correction that affected most stocks in the biotech industry in 2014. All of this selling has left AMAG with an improved valuation.

AMAG is trading at 5 times sales and 2.4 times its book value per share. This is significantly below the average for the biotech industry. The biotech industry is trading with a price to sales ratio of 8.7 and a price to book ratio of 8.1. This shows that AMAG is priced 38% below the industry in terms of price to sales and 72% below the industry in terms of the company's balance sheet. When looking forward, AMAG is trading at 3.8 times expected 2014 sales and 3.6 times expected 2015 sales. AMAG is expected to achieve about 30% revenue growth in 2014 to nearly $105 million. This should help the company get closer to profitability, which it is expected to achieve in the second half of 2014.

AMAG's price to book ratio is attractive due to the company's strong balance sheet. AMAG has $214 million in cash with zero debt. The company has over seven times more current assets than current liabilities. This shows that the company is on solid footing as it should have no problems paying off its short-term obligations. It also has 2.9 times more total assets than total liabilities. With zero long-term debt, AMAG is not weighed down with long-term financial obligations. With over two times more cash than 2014's expected revenue, the company has plenty of money on hand to help grow the business.

Overall, AMAG's current valuation provides investors with an attractive entry point for the stock. The stock should have plenty of room to move higher as AMAG works to increase revenue and operate with profitability.

Efforts to Increase Market Share of Feraheme and MuGard

AMAG's stock is set-up nicely for higher gains due to its valuation. The company's efforts to increase market share of Feraheme and MuGard should catalyze future stock gains. AMAG needs to heed the FDA's requests that were spelled out in the CRL regarding Feraheme. If the company follows the FDA's requests, it is likely that Feraheme will be approved for treating iron deficiency anemia beyond those with chronic kidney disease. The expanded use of Feraheme upon an FDA approval should double the market opportunity for AMAG from $250 million in potential sales to $500 million in potential sales.

Feraheme has four competing drugs on the market: Venofer, INFed, Ferric Gluconate, and Injectafer. Venofer has the highest market share at 46% as measured in grams using 2013 data. The entire I.V. iron market in the U.S. is 850,000 grams. INFed has the 2nd highest market share with 22.5%, while Ferric Gluconate has 15.6% of the market. Feraheme currently has 15.5% of total market share. Injectafer is a new drug that was approved in July 2013. Injectafer's market share is only 0.4%.

Upon Feraheme's approval for expanded use, AMAG would be able to communicate with the same physicians who prescribe Feraheme for its current approved use. AMAG could leverage its existing relationships with those physicians to increase market share.

AMAG also has plans to increase the market share of MuGard. The company is also leveraging its relationships with oncologists who prescribe Feraheme to increase the growth of MuGard. The market opportunity is large for MuGard since about 400,000 people are affected with oral mucositis annually. With the current price of MuGard at $1500, the total market for treating oral mucositis is $600 million. For every market point that AMAG gains, its revenue increases by at least $5 million.

AMAG can increase MuGard's market share by increasing the prescriptions through physician targeting and product differentiation. MuGard was recognized in the journal Cancer for being more effective than sham-control for significantly reducing pain associated with oral mucositis. The study shows that MuGard has strong product differentiation with its effectiveness. This is a great selling point for AMAG representatives to sell MuGard to prescribers.

Another way to increase MuGard's market share is through the expansion of insurance coverage. This would improve patient access and allow AMAG to increase MuGard revenue. The company implemented a patient assistance program earlier this year. The program supports uninsured patients and offers an offset to program to help those with high copayments. The simultaneous efforts to expand insurance coverage and increase prescriptions on the strength of product differentiation are likely to increase MuGard's market share and thus AMAG's revenue.

These efforts are likely to lead AMAG on its way to profitability. Currently, the company is expected to achieve a positive EPS for Q3 2014. This turning point should also allow AMAG's negative cash flow to turn positive in future quarters. In 2013, AMAG had a cash burn of $7 million. However, the company also achieved $81 million in revenue last year and the balance sheet is strong. Therefore, I think that AMAG is on solid financial footing. I also think that the cash flow will turn positive as the company improves its profitability.

The Risks

One risk for the company is the lack of a transparent pipeline. Most biotech companies have transparency regarding the exact drugs that are being developed and their clinical stage of development. However, AMAG does not develop its own drugs. Instead, the company has a strategy to expand its product portfolio through in-licensing or acquisition. As a result of this strategy, we do not know what new developments are on the horizon. There is no transparency in what companies AMAG is in collaboration with regarding new developments. The good news is that future revenue can be forecasted for sales of the current products, Feraheme and MuGard.

Another possible risk is the threat of share dilution because the company filed an S-3. This could indicate that AMAG is interested in doing a share offering to raise money for an acquisition. The S-3 filing shows that the company could implement a share offering of up to $250 million. That's about 62% of AMAG's market cap. Doing a share offering would dilute the existing shares, which is likely to reduce the value of the stock. However, AMAG does have over $200 million in cash, so small acquisitions are possible without a share offering.

Conclusion

AMAG is attractively priced as compared to the biotech industry. The company is at a turning point as it is expected to produce positive EPS in the second half of 2014. The efforts to increase sales of Feraheme and MuGard are likely to drive increased revenue and improved profitability for the company. However, the lack of transparency for new developments and the risk of a large share offering could keep many investors on the sidelines.

Source: AMAG Pharmaceuticals: Biotech At A Turning Point